Spain’s borrowing costs climbed at its latest bond auction due to an alleged corruption scandal amongst top politicians and concerns over its weak economy.

However interest rates on the 4.6 billion euros worth of government bonds that were sold remain far below previous crisis levels and demand from investors was solid.

For bonds maturing in two years time, Madrid had to offer just over 2.8 percent, but that is well down on the more than seven percent reached last summer.

“The result of today’s auction reflects the recent shift in sentiment towards Spain – a marked increase in yields after months of declines,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

But he said that Spain should be pleased by the results given the current economic and political problems.

Scandal

Spain is also being scrutinised by investors for potential political instability because of a widening corruption scandal involving officials of the ruling People’s Party.

A former party treasurer, Luis Barcenas, has described as fakes handwritten ledgers published last week by El Pais newspaper, which accused the party of channelling payments through secret accounts from managers of building companies to its leaders, including Prime Minister Mariano Rajoy.

Rajoy has also denied any wrongdoing.

Headwinds

Spain has been at the centre of the eurozone debt crisis as it fights to deflate one of the highest budget deficits in the bloc through wide-reaching austerity measures, which many claim could make economic recovery harder.

The government is expected to announce a public deficit of around seven percent of gross domestic product in 2012 in the next few weeks, down from over nine percent a year earlier.

However, many fear such a sharp reduction implies unprecedented budget cutting efforts that will be near impossible to continue.

Madrid’s budget plan faces strong headwinds from rising costs of unemployment at 26 percent, an aging population and high debt funding bills.